Can Two or More Wave Interpretations be Equally Probable? Robert Prechter Explains

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Can Two or More Wave Interpretations be Equally Probable? Robert Prechter Explains
The foremost expert on Elliott waves and author of one of the bibles of technical analysis provides insight

By Bob Stokes
Tue, 22 May 2012 16:45:00 ET

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No analytical method can offer 100% clarity about the market's future.

Yet critics of technical analysis, particularly Elliott waves, say that popular technical methods fail if they don't do just that. Of course, that's unreasonable. Perhaps you've noticed that the critics don't hold other analytical methods – not least of all fundamental analysis – to such an impossible standard.

However, Elliott wave analysis does offer what other market assessment methods do not:

What the Wave Principle provides is a means of first limiting the possibilities and then ordering the relative probabilities of possible future market paths. Elliott's highly specific rules reduce the number of valid alternatives to a minimum

Elliott Wave Principle, (pp. 94-95)

Do you know of another analytical approach that does this? We don't.

Some critics erroneously assert that two or more wave interpretations of the market's price pattern can be equally valid.

One shouldn’t confuse the fact that the practical application of the Wave Principle is an exercise in ranking probabilities with the idea that different opinions are equally valid. Two possible paths for the market are almost never equally likely. So, two opinions are almost never equally valid...When two wave counts have opposite implications, other evidence monitored by [The Elliott Wave Theorist] is usually so one-sided that a clear preference can be discerned. Occasionally, the less probable scenario works out, of course; that is what the word “probable” means. (emphasis added)

Prechter's Perspective

Determining the probabilities of a market's direction often requires patience. And it's during these times that critical voices are often loudest. But, as most experienced traders will tell you, patience has its rewards. The classic book Elliott Wave Principle (p. 96) explains:

There are often times when, despite a rigorous analysis, there is no clearly preferred interpretation. At such times, you must wait until the count resolves itself. When after a while the apparent jumble gels into a clear picture, the probability that a turning point is at hand can suddenly and excitingly rise to nearly 100%.

Elliott wave practitioners know their discipline requires work. Yet that work can yield timely money-making insights.

Robert Prechter is recognized as the world's foremost authority on the Elliott Wave Principle; in fact, he literally wrote the book on it. Today his classic text, Elliott Wave Principle – Key to Market Behavior, is one of the bibles of technical analysis.

Prechter has been analyzing the market for decades. He has served as the president of the Market Technician's Association and on the board of the Foundation for the Study of Cycles. Traders Library has granted him its Hall of Fame award.

On Friday, May 19, he made yet another contribution to the study of markets and technical analysis. He produced a special double issue of his Elliott Wave Theorist

The new May Theorist features 21 pages with 25 charts, going back 2 months, 1 year, 3 years, 5 years, 12 years, 17 years, 25 years, 38 years and 80 years, covering the Dow, the S&P, the NASDAQ, and the CRB index of commodities.

There's a reason Prechter chose to publish a double-length Elliott Wave Theorist at precisely this time.

Learn why via a 30-day risk-free trial>>

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Tags: Dow Jones Industrial Average (DJIA), Elliott wave, Elliott Wave Theorist, Elliott Wave trading, Fibonacci, market forecasts, Nasdaq Composite, New York Stock Exchange (NYSE), Prechter's Perspective, Robert Prechter, S&P 500, technical analysis, Traders

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Classic Prechter

The Elliott Wave Principle is a detailed description of how financial markets behave. The description reveals that mass psychology swings from pessimism to optimism and back in a natural sequence, creating specific Elliott wave patterns in price movements. Each pattern has implications regarding the position of the market within its overall progression, past, present and future. The purpose of Elliott Wave International’s market-oriented publications is to outline the progress of markets in terms of the Wave Principle and to educate interested parties in the successful application of the Wave Principle. While a course of conduct regarding investments can be formulated from such application of the Wave Principle, at no time will Elliott Wave International make specific recommendations for any specific person, and at no time may a reader, caller or viewer be justified in inferring that any such advice is intended. Investing carries risk of losses, and trading futures or options is especially risky because these instruments are highly leveraged, and traders can lose more than their initial margin funds. Information provided by Elliott Wave International is expressed in good faith, but it is not guaranteed. The market service that never makes mistakes does not exist. Long-term success trading or investing in the markets demands recognition of the fact that error and uncertainty are part of any effort to assess future probabilities. Please ask your broker or your advisor to explain all risks to you before making any trading and investing decisions.